Types of Cognitive Bias Discussion Queries please answer the questions only two as soon as thank you Q5: Considering the definition of these three cogniti

Types of Cognitive Bias Discussion Queries please answer the questions only two as soon as thank you Q5: Considering the definition of these three cognitive biases: Confirmation bias the tendency to search for, interpret, focus on and remember information in a way that confirms one’s preconceptions. Anchoring or focalism the tendency to rely too heavily, or “anchor”, on one trait or piece of information when making decisions (usually the first piece of information acquired on that subject Framing drawing different conclusions from the same information, depending on how that information is presented Identify if any of the above influence expert bias. Q6: Accounting expert bias has typically been illustrated by self-imposed expert behavior. Express the reasons why accounting experts will choose to engage in this type of behavior.please look on the artical to answer these questions Journal of Accounting, Ethics & Public Policy
Volume 8, No. 1 (2008)
THE ADVERSARIAL BIAS OF ACCOUNTING EXPERTS
IN FINANCIAL LITIGATION: AN EMPIRICAL ANALYSIS
OF COMPROMISED OBJECTIVITY IN ACCOUNTING
EXPERT TESTIMONY.
James A. DiGabriele1
Abstract
Expert testimony is important to the
accounting profession because accounting experts
are frequent participants in litigation proceedings.
This study empirically investigates adversarial
expert witness bias, defined as witness behavior that
occurs when experts intentionally advance the goals
of the party compensating them in a legal action
such as valuation litigation. Cumulatively, the
findings of this study support the view that expert
witnesses present valuations to the Court that differ
significantly from one another and from court
valuations.
INTRODUCTION
Valuation expert testimony is important to the accounting
profession because it serves as a significant service niche. The
American Institute of Certified Public Accountants (AICPA) has
made a direct commitment to support its members specializing in
these types of services that extend into expert testimony. The
1
Assistant Accounting Professor, Montclair State University, School of
Business, Department of Accounting, Law & Taxation School of Business.
digabrielej@mail.montclair.edu; jim@dmcpa.com
2
DiGabriele: Adversarial Bias of Accounting Experts
Business Valuation and Forensic & Litigation Services Center
(BVFLS) is a complete web community with professional
resources and practice aids for members of the BVFLS section. A
noteworthy link on the web site is the Daubert Tracker. The
Daubert Tracker provides expert witness members access to
information associated with cases on evidentiary issues.
Daubert v. Merrill Dow Pharmaceuticals (1993), along with
Kumo Tire Co. v. Carmichael (1999), directly contributed to the
amendment of Federal Rule of Evidence (FRE) 702 in 2000, which
effectively changed the way experts testify in Court. The amended
(FRE) 702 codified what has come to be known as the reliability
test for expert testimony. The most obvious reason for the
amendment is to curb expert testimony that appeared outrageously
speculative to advance a clients’ verdict preference.
The majority of accounting experts who prepare valuation
reports are also likely to possess at least one or possibly several
valuation and forensic accounting designations from the following
organizations: the American Society of Appraisers (ASA), the
Institute of Business Appraisers (IBA), the National Association of
Valuation Analysts (NACVA), the American College of Forensic
Examiners International (ACFEI), the Association of Certified
Fraud Examiners (ACFE) and the AICPA. The credentials are
similar in requirements, as they all require passing a proctored
exam as well as some form of experience. However, only the
Certified Valuation Analyst (CVA)2, the Accredited in Business
Valuation (ABV)3, and the Certified Forensic Accountant (Cr.FA)4
credentials require a candidate to also be a Certified Public
Accountant (CPA). It is theoretically perceived by the litigation
community that the attainment of these additional professional
certifications enhances the creditability of an expert’s testimony.
2
Conferred by the National Association of Certified Valuation Analyst
(NACVA).
3
Conferred by the American Institute of Certified Public Accountants (AICPA).
4
Conferred by the American College of Forensic Examiners International
(ACFEI) and the American Board of Forensic Accounting (ABFA).
Journal of Accounting, Ethics & Public Policy
Volume 8, No. 1 (2008)
3
All of the above named organizations have, in some form, a
code of ethics that governs members’ behavior. The NACVA
professional standard 1.2(a) states, “A member shall remain
objective, apply professional integrity, and shall not knowingly
misrepresent facts or subrogate judgment to others. The member
must not act in a manner that is misleading or fraudulent.” The
AICPA’s first Statement on Standards for Valuation Services
(SSVS) (2007) requires objectivity in the performance of all
professional services including valuation engagements5. Section
14 of SSVS no. 1 maintains that, “the principle of objectivity
imposes the obligation to be impartial, intellectually honest,
disinterested, and free of conflicts of interest.” The remaining
organizations have similar provisions in their rules of professional
conduct and professional standards.
The operative theme in accounting expert testimony is for a
credentialed expert to remain objective in their findings.
Objectivity is a critical element when appearing before a Trier of
fact (judge or jury). The only exception exists when an expert is
retained solely as a consultant; there is a great difference between a
testifying expert and a consulting expert. “In the capacity of a
consultant, the expert is in a position similar to that of an associate
of the attorney and thereby coming under the privilege rules
protecting the consulting expert’s work product” (Michaelson
2005). A consulting expert can act as an advocate because their
opinions and analyses are not discoverable. However, once an
expert is engaged as a witness and begins formulating opinions as
a part of the case before the court, the privilege is waived and the
information to be provided by that expert is discoverable. Should
the work product exhibit advocacy on the client’s behalf, that
failure to remain objective may very well render the expert’s
credibility as biased and the client’s case becomes compromised.
It would seem logical that accounting professionals
performing valuation expert testimony services would not have any
5
Valuation engagement is referred as an engagement or any part of an
engagement that involves estimating the value of a subject interest.
4
DiGabriele: Adversarial Bias of Accounting Experts
problem adapting to the principles of objectivity, since members of
the AICPA are introduced to this concept from membership
inception (objectivity is also part of the AICPA Code of
Professional Conduct). The reality is, accountants regularly offer
expert testimony services to the litigation community and their
testimony is frequently scrutinized by the court, and at times
excluded because the principles of objectivity has moved into
biased advocacy. The Court is then left to grapple with this
problem; in Wagner v CIR (2001), the Tax Court rejected all
expert testimony and determined that, “the reports and testimony
of the experts in this case are so dissimilar that the reliability of the
experts is brought into question.” The Court concluded that the
experts were biased and acted as advocates for their respective
clients. It then went further to state that; “the experts’ lack of
impartiality has caused a disservice to the Court and the system of
tax administration.”
This study empirically investigates the research question; is
the behavior of valuation experts biased towards the party
compensating them in cases of valuation litigation? These types of
cases include matrimonial, tax, shareholder/partner disputes, and
economic damages. This exercise is primarily motivated by the
lack of literature on the topic. This study is unique because it
directly focuses on cases that include two experts offering
testimony for opposite sides and then uses the distance between the
testified values as a proxy for bias to measure the underlying
incentives that may compromise objectivity.
Previous academic research on expert testimony has
implied that there is a problem of valuation expert bias. As far
back as the 1960’s, Bosland (1963) found a growing tendency for
the Tax Court to reject both experts’ valuations and to rule
somewhere in the middle. Englebrect (1979) advanced Bosland’s
findings and illustrated a near perfect correlation between the
Court’s value and the mean of valuations presented by opposing
experts in the Tax Court. Beatty, Riffe and Thompson (1999)
demonstrated that the behavior of expert witnesses in Tax Court
Journal of Accounting, Ethics & Public Policy
Volume 8, No. 1 (2008)
5
cases is consistent with their inspired motivation to please their
clients.
This paper will make several contributions to the academic
research on issues affecting accounting experts participating in
valuation litigation. First, this study provides an empirical basis
for evaluating biased behavior of valuation experts by using a
repeated measures analysis of variance (ANOVA) model to
investigate this phenomenon. Second, with the continual evolution
of expert testimony services in the accounting profession, this
research directly contributes to the development of ethical
standards by quantifying areas of biased behavior. Third, the
results of this paper will also serve practitioners by demonstrating
the ethical dilemma that may ultimately await them if this type of
behavior is employed in their work. Finally, the paper fills the
void of the shear lack of research in this area and contributes
directly to the evolution of these services since they are effectively
in the growth phase of the service life cycle.
This paper is organized as follows; the next section acts as
a review of the literature that motivates this study. Section III will
analyze the methodology and data extraction techniques employed
in the study. Section IV will examine the results and discuss the
findings of the study, and the final section concludes the paper.
REVIEW OF THE LITERATURE
Adversarial bias can be identified as witness bias that
occurs when experts are retained to advance the goals of the party
compensating them in a litigation proceeding (Bernstein 2007,
Beatty Riffe and Thompson, 1999). This issue poses an enormous
problem in valuation litigation, even though Courts have
repeatedly stated that an expert witness has a duty to the Court and
to the truth of the findings, as opposed to the party that pays them
(Weil, Wagner, and Frank, 2001). As previously mentioned, there
is a dearth of research on this topic. However, there are several
studies in the literature that have demonstrated implications for
valuation experts.
6
DiGabriele: Adversarial Bias of Accounting Experts
Beatty, Riffe and Thompson (1999) examined a sample of
Tax Court cases from 1964 through 1986 to investigate the
accuracy of the method of comparables valuation that is regularly
submitted to the Court in expert reports. The method of
comparables valuation is a method that values a private company
by relating market value multiples of similar public company
stocks to the financial variables of the subject private company (i.e.
price earnings multiples). The findings in this research suggest
that experts are capable of selecting valuation models with
comparables and parameters that benefit the individual(s) they are
representing. The apparent motivation in this area of expert
testimony is to present the most favorable tax payment to the
taxpayer.
Beatty, Riffe and Thompson (Beatty et. al.) (1999) used a
small sample of thirty-one (31) Tax Court cases. In addition, the
cases spanned a period of twenty-two (22) years, 1964-1986. The
data from this period may very well reflect a limitation due to the
underdeveloped area of expert testimony in valuation litigation.
For example, the first business valuation credential was conferred
by the Institute of Business Appraisers (IBA) in 1978. Clearly, the
valuation discipline as we know it today was in its infantile stages
during the period of the Beatty et. al. study. The results may have
been compromised because experts at the time of the study did not
have the professional foundational support and continuing
professional education that currently exists. The profession has
since been populated with certifications accompanied by
continuing professional education in addition to objectivity
requirements in the corresponding codes of ethics that attempt to
curb advocacy behavior. When considering that point alone, the
issue of expert bias in valuation litigation warrants a further
expansion of the current body of knowledge (Fannon, 2007).
With the advent of several organizations6 providing
credentials that lend themselves to expert testimony a question
6
NACVA also has the following credentials, Certified Forensic Financial
Analyst (CFFA) and Accredited Valuation Analyst (AVA). The Institute of
Journal of Accounting, Ethics & Public Policy
Volume 8, No. 1 (2008)
7
may arise; have these credentials advanced the principles of
objectivity in valuation testimony? Not necessarily; according to
the Court in a recent case, they believed there was expert bias that
caused the testimony to be excluded as unreliable. In re Med.
Diversified, Inc. (2006) the Court noted bias in the selection of
subjective inputs in the valuation models of the subject company.
The Court believed there was bias in the application of the
discounted cash flow method (DCF) due to a lack of details
regarding forecasted revenues. The Court found that the expert, a
credentialed ASA7 and AVA8, selected different periods to
calculate each multiple used in the comparable companies method
of valuation to benefit their client. Moreover, the Court noted that
the expert selected a small group of comparable transactions and
excluded transactions that were considered most comparable,
therefore skewing the value. Evidently, this expert compromised
the objectivity standard by moving from impartiality to advocacy.
However, there are of course circumstances where expert
testimony may come under fire but ultimately receives Court
acceptance. In Primavera Familienstifung v. Askin (2001), an
expert’s testimony was carefully scrutinized by the Court under
federal rule of evidence (FRE) 702. Upon subsequently meeting
factors of (FRE) 702 the Court concluded that there are sufficient
other “indicia” of reliability to warrant acceptance of the expert’s
testimony.
Compromised objectivity can take place in several forms.
The focal point of accounting expert bias has typically been
illustrated by self-imposed expert behavior. Conversely, attorneys
may also play a part in swaying an expert’s opinion. There are
times when attorneys include the expert in trial preparation and
review the line of questioning that reveals their verdict preference.
The byproduct of this exercise is the potential influence it may
have on the expert’s testimony. Research on this issue indicates
Business Appraisers (IBA) offers the following credentials; Certified Business
Appraiser (CBA) Business Valuator Accredited for Litigation (BVAL).
7
American Society of Appraisers certification.
8
NACVA certification, Accredited Valuation Analyst.
8
DiGabriele: Adversarial Bias of Accounting Experts
that it does. Ricchiute (2004) found that hints of an attorney’s
position in cases of auditor liability directly influences an
accounting experts decision regarding auditor compliance with
generally accepted auditing standards (GAAS). This study used 45
participants from the litigation services department of a Big 5 CPA
firm. The author simulated an auditor liability case environment
that included audit working papers from a previously tried Big 5
auditor liability case. The limitation in these findings is the fact
the there was a narrow sample of partners and managers working
on a permanent basis in the litigation services area. The author had
to pool partners and managers who were assigned to the litigation
area temporarily (12 partners). The natural concern is; were these
temporary partners and managers qualified to participate in such an
experiment? The reason for this concern lies in the special skills
involved in litigation services, which are acknowledged and
defined by the AICPA (2004) memo as, “the application of special
skills in accounting, auditing, finance, quantitative methods,
certain areas of law and research, and investigative skills to collect,
analyze, and evaluate evidential matter and to interpret and
communicate findings.” A participant that does not possess this
skill set may not fully understand their role and be led astray.
Non-empirical literature has continually reiterated the
requirement of objectivity in expert witnessing and has recognized
the expert bias problem. Damodaran (2007) recognizes that bias
built into the valuation process is the enemy of valuation. He goes
on to state, “You tell me who’s paying the expert and I’ll tell you
what the bias is and where it is going in the analysis.” Crumbley
and Russell (2004) direct experts to not allow the attorney to shape
their testimony. Stimpson (2005) notes the biggest misconception
at times can be that an expert will become an advocate for a client’s
position. There are often times that the expert opinion does not
represent the client’s objectives. A truly impartial expert does not
take issue with this; however, there are circumstances when
experts may have to remove themselves from the engagement.
Fannon (2007) asserts expert testimony, at times, assists the
Court in determining financial settlements. There are occasions
Journal of Accounting, Ethics & Public Policy
Volume 8, No. 1 (2008)
9
when this process fails. Expert testimony does not help the Court
when the expert takes an advocacy position for the client.
Frequently a court is presented with financial guidance and has no
choice but to make its own determination because of expert bias.
In Delaware Open MRI Radiology Associates, P.A. v. Kessler,
values of the subject company presented to the court were so
extreme the court had to provide a value to bring the case to a
close.
The literature paints a clear picture of the balancing act
accounting experts face as they attempt to maintain objectivity
while accommodating the natural propensity of human behavior,
“to do something serviceable for those who employ you and
remunerate you (Bernstein, 2007).” Accordingly, the following
hypotheses are proposed:
H1: There is a significant difference between opposing
experts’ valuations presented to the Court.
H2: The higher expert valuation is significantly higher from
the value determined by the Court.
H3: The lower expert valuation is significantly less than the
value determined by the Court.
METHODOLOGY AND DATA EXTRACTION
Data was extracted from the sample period of January 1996
through December 2006 from two sources. The first source was a
searchable database of the publication Business Valuation Update
from Business Valuation Resources. This journal provides articles
and research on business valuation. Included in this journal is a
section titled, “Legal and Court Case Update”. This section
highlights court cases that are relevant to the valuation expert
witness practitioner on topics such as valuation of closely held
companies in matrimonial litigation, valuation of economics
damages in civil litigation, and issues in partner/shareholder
disputes, merger and acquisition litigation, and bankruptcy.
Each highlighted court case differs in content. For
example, some case briefings include such items as case citations,
the valuation arrived at by each expert, the party represented by the
10
DiGabriele: Adversarial Bias of Accounting Experts
experts, the credentials of the experts, the year of the case, and the
courts’ accepted value. To be included in the sample the following
variables must have been present in the search: the year of the
case, valuations from opposing experts, the courts value and type
of case. Credentials of experts were also extracted when available.
The second source was the Lexis-Nexis database. This
served as a sanity check for the cases that were selected. The
extracted cases were reviewed for accuracy by searching the case
citation in the Lexis-Nexis database, while also verifying the
plaintiff and defendant in matrimonial matters. The sample data
consisted of 103 cases that were adjudicated between 1996 and
2006. The extracted variables were…
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